There are approximately 8,000 professionally managed mutual funds in operation in the United States, and the number grows annually. Each year, 80% of them fail to beat the S&P 500 Index, and that statistic alone has spawned an entire class of Index Funds, i.e., funds that track various equity indexes, such as the S&P 500, the NASDAQ 100, the Russell 2000, AMEX, DJIA, NYSE, and the like. Much of the financial news media highlights those professional managers who have beaten the market over some length of time. However, the universe of managers from which such achieving managers, often called “superstars,” is drawn excludes many investors who manage their own investments. Accordingly, the identification of star performers is currently drawn from a small subset, professionals, of the universe of all investors.
The most basic question that any investor has is: “How am I doing?” In the case of the typical, non-professional investor, this question is hard to answer because their pattern of investing is irregular. Current typical methods of determining return on investment assume either a single investment with a regular stream of payouts, or a schedule of uniform investments over time. Any stream of investments and payouts that is not constant yields misleading performance results.
In the case of professionally managed mutual funds, which have cash inflows and outflows on an irregular, and typically unpredictable basis, the Net Asset Methodology (NAV) takes these variables into account. The investment performance, typically a calculation of investment return of the fund based on NAV per share, has become commonly accepted among the professional money management community, and is widely regarded as the most accurate way to measure investment performance. However, there is currently no way for individual investors to apply this methodology to their own portfolio(s).
A shift in demographics and societal norms, particularly driven by the Internet-driven information access, that is fundamentally altering the way individuals manage their personal financial assets. Increasingly, consumers are taking direct control over their personal financial affairs because: 1) advances in technology make it easy to do so, 2) it is more convenient and less expensive than relying on financial intermediaries, and 3) the poor or erratic performance of the professionally managed funds encourages investors to manage their own funds, not only for the financial rewards, but also because of the intellectual and financial challenge, and the satisfactions derived from those management activities.
Investors want the flexibility to invest at times and in places that are convenient for them. The broad availability of financial information on line promises to dramatically narrow the gap between the resources available to the individual investor and the institutional investor. Individual investors have become increasingly sophisticated and knowledgeable about investing, having experienced greater access to stock quotes, company financial information, investment advice, and other investment information on the Web or through other services. As investors obtain even greater access to these resources, they will desire even greater control over their financial decisions and seek alternative ways to invest more successfully.
There is currently no way for investors to: 1) see the whole investment picture; 2) objectively and independently measure their own success, 3) compare their own performance with other investors; 4) obtain advanced, accurate and highly pertinent metrics by which their performance and investment management skills growth can be measured; 5) obtain access to a universe of high-performing investors for analysis, commentary and exchange of investment ideas; and 6) enter the field of fund management as a professional based on building a performance track record. In part this gap in the whole investment picture is due to a lack of a way and medium in which similarly-minded individual investors can communicate to empower themselves to make better personal investment decisions with the benefit of a larger group's insight, but with the key difference as compared to investment clubs, that the insights can be gauged against objective metrics.
To Applicants' knowledge, there are no prior art Internet-based systems offering identification of the best investors in a large universe of investors. In the arena of feedback services, Clearstation and Iexchange offer feedback on tips only, not an entire portfolio. Various online tracking sites offer price history and total returns only. Off the shelf individual investment programs such as Intuit's Quicken are not intuitive, are expensive and often are not web-based nor integrated with actual trades. Professional financial advisors, of course offer investment advice and many execute trades, but 8 of 10 managers fail to beat the passive index.
In the arena of investment advice, there are various on-line bulletin boards, but none rank advisors, and even if the advisor is known, the actual performance is not disclosed. Rumor and speculation is not distinguished from performance-based evaluation. An example is the investment swindle involving an anonymous tipster on a financial Web site (Raging Bull). The tipster sang the praises of E-pawn.com, a Florida-based Web site. That turned out to be part of a “pump-and-dump” scheme, which scheme is part of a federal indictment by the US Attorney's Office in New York, in which 120 people were charged in the summer of 2000 with securities fraud and related crimes. E-pawn was 1 of 35 companies whose stock was manipulated, at a cost of approximately $50 million to investors.
The use of community-based investment approaches has been pervasive for as long as there have been individual investors. Before computers, and continuing to this day, individuals in investment clubs pool their ideas in the hopes of increasing their returns. Many of these clubs started out informally, through schools or churches. Now, the AAII (American Association of Individual Investors) and other private organizations have formal networks of investment clubs throughout the nation. These associations provide educational and organizational services for their members. With the advent of browsers, community investing moved effortlessly onto the web, even before the mid 1990's. Bulletin boards sprang up immediately and have since mushroomed, allowing individuals all over the world to share their investment ideas with investors everywhere.
Some organizations have attempted to cull the “best” ideas from the bulletin boards, but that is very difficult, given the existing methodology. Everyone has an opinion, but many so-called experts post comments under aliases. It is very hard, if not impossible, to tell who is speaking, and what their motivation is. For example, are they pumping the stock, and if so is it part of a stock fraud? Is it a 14 year old who has never invested a dime? Or, is it a long time investor with a poor track record? There is no requirement that they be skilled investors with proven track records, or that they are honest and truthful, or hold the stock that they tout, and for what reason (e.g., to get out of a bad position, or to hype the stock for a quick kill). Sample bulletin boards include: Yahoo, Motley Fool, and Silicon Investor). Attempts so far to measure the abilities of bulletin board participants have been limited, and for the most part, unsuccessful.
Sites that measure ability focus on whether or not a particular individual recommends a stock that subsequently performs. This attempt at measuring stock picking does nothing to address issues of when to buy/sell, asset allocation, or the ability to make money in a total portfolio. Examples of stock picking sites include Iexchange.
A few mutual funds have launched within the last year or so, basing their stock picks on those of their community. In these community-based funds, an “ubermanager” reviews the stock picks of many community members, decides, based on unpublished criteria, which ones may have validity, and then acts on those for the good of the fund. These funds are called “community” funds. One serious problem with such type of funds, beyond their track record on not having done very well (see, for example, the funds of sites StockJungle and Mutual Minds), is that they are managed, in essence, by committee. Further, they are subject to mass opinion manipulation and momentum-based transactions, which may also be characterized as a “hype-sensitive investment climate” resulting from investors second-guessing their own investment approach by combining their ideas with the opinions and decisions of others in the community. Community-based investment decisions tend to result in voting for stocks to be included in a fund.
With respect to credibility, Clearstation and Iexchange offer rankings on tips only, not overall performance. With respect to performance, various mutual funds and advisors can only push level of service, and make it clear, for liability purposes that they cannot guarantee performance.
Thus, there is a strong and continuing unmet need in the financial services market which provides daily feedback of a significant and appropriate type, both qualitatively and quantitatively, for investors to answer their prime questions, especially in a volatile market, of: “How am I doing?” and “How can I do better?.” There is also a need for ranked advice so that the investor knows the track record, on an ongoing and near daily basis, of a particular advisor in order to gauge credibility. There is a need to widen the pool of high-performance advisory investors and a system of establishing their credibility. Finally, there is a need for a system that can continuously and iteratively identify and build funds around the best investor performers in every sector.